Refco and the IPO Motive

"There is no question if these were credit loses that would have definitely reduced the performance of the firm,'' says Peter Nerby, a senior credit officer with Moody's Investors Service. "That would have affected how we would have viewed the creditworthiness of the company.''

A Refco spokesman declined to comment on the hefty payout. Dittmer could not be reached for comment. Bennett's lawyer, Gary Naftalis, could not be reached for comment.

Nerby says that acknowledging the losses up front, instead of concealing them, would have reduced earnings at Refco and possibly reduced its capital. And Refco was "a thinly capitalized firm to begin with,'' he says

A reduction in working capital would have been particularly troublesome for Refco in the late 1990s, when it first considered the idea of an IPO. It would have jeopardized the firm's then-AA credit rating and made it far more costly to borrow money.

If Refco had revealed the true state of its finances, Bennett might have had a hard time convincing Bawag to invest in the brokerage. It certainly would have caused Thomas H. Lee Partners to walk away in 2004.